6 Ways to Put Your 2011 Payroll Tax Break to Work
With Congress and President Obama having put their stamp of approval on the 2011 tax deal, a major component of the legislation affecting virtually all working Americans is a change to the payroll tax. Historically, employees were subject to a tax of 6.2% of earnings up to a cap, which is $106,800 for 2011. In order to help stimulate the economy and achieve a compromise on tax breaks, this payroll tax has been reduced to 4.2% for 2011, effectively giving everyone a 2% raise on their first $106,800 earned (so a full 2% raise for most of us!). With this new-found bonus for 2011, are you going to just let it melt into your budget and spend it blindly (which is what the government intended) or strategically allocate this money to a specific objective or cause?
Increase Your 401(k) Contribution
This is what I'm doing. I went into my 401(k) account first thing and immediately increased my contribution by 2%. Since we were making do with my take-home pay last year, I figured by automatically directing the extra 2% right to my retirement account, we wouldn't even notice the difference. Who knows, if I get a decent raise this year, maybe I won't even have to back it down again in 2012 when the 2% break expires.
Build Your Emergency Fund
With so few people having a sizable emergency fund for layoffs or life events, it's worth considering shifting some extra funds into a dedicated emergency fund account (for more, see "Figuring the Size of your Emergency Fund").
Pay Down Debt
Allocating an additional 2% monthly to existing high-interest debt may be a better use of your funds than any other options presented, especially if you're talking about credit card debt with an interest rate over 20%.
Give It Back
Many people are frustrated with the constant government giveaways and don't feel they actually deserve or need this tax break. As a result, they're giving the money away. For instance, some professors started a website that allows "the rich" to give back tax deductions in the name of job creation at Give It Back for Jobs. If that's not your fancy, surely there's a local cause or favorite charity where you could direct an equivalent amount from your payroll tax break.
With young children, setting aside just a few thousand dollars a year goes a long way in helping to offset the costs of college. Presently, the most popular option is the 529 plan (see this 529 plan article on the benefits of the pre-paid tuition vs. self-directed investment options).
Invest in Your Home with Green Upgrades
Perhaps you've been putting off that new energy-efficient front door or replacing a few windows. Well, part of the 2011 tax deal is also an extension of some portions of the energy tax credit. While the credits aren't as attractive as they were in 2009 and 2010, you can still save a few hundred dollars on an energy upgrade for your home and realize the longer-term benefits of lower costs moving forward.
What are you going to do with your 2% raise?